Lee is considering buying one of two newlyminusissued bonds. Bond A is a twentyminus year, 7.5% coupon bond that is nonminuscallable. Bond B is a twentyminus year, 8.25% bond that is callable after two years. Both bonds are comparable in all other aspects. Lee plans on holding his bond to maturity. What should Lee do if he feels that interest rates are going to decline by 2% in the near future and then remain relatively stable thereafter?

Question

Walton

Business

29 September, 00:50

Lee is considering buying one of two newlyminusissued bonds. Bond A is a twentyminus year, 7.5% coupon bond that is nonminuscallable. Bond B is a twentyminus year, 8.25% bond that is callable after two years. Both bonds are comparable in all other aspects. Lee plans on holding his bond to maturity. What should Lee do if he feels that interest rates are going to decline by 2% in the near future and then remain relatively stable thereafter?

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Answers (1)

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Annalise Pacheco · Answer 1

Bond A will be purchased

Explanation:

He will purchase Bond A, since the 20-year interest payments are fixed guaranteed and can not be named called. When he buys bond B, after 2 years the corporation will actually call the bond, as it would be easier to call the bond and issue a new bond at a lesser interest rate.

When a bond is named it means the issuer takes the bond back and charges the holder the bond's face value (what the initial purchaser paid for it)